The age of restraint
Date: Friday, December 05, 2008
Author: Henry Thornton

We may come to call this the age of restraint.

Retailers are going broke, boomtime financiers are in deep trouble, car sales and housing approvals are plummeting, manufacturing activity is plunging, business investment intentions are cooling.

All of these comments apply to Australia, previously described (perhaps with deep irony) as 'the miracle economy' or 'the nirvana economy'.

They apply with even greater force to most other economies.

The euphoria of last week in equity markets is long gone, and the correction of asset values goes on despite massive interest rate cuts and promised fiscal expansion.

From the USA comes the latest gloomy bulletin: 'General Motors acted as a hefty drag on the Dow Jones Industrial Average, falling US79 cents, or 16 per cent, to 4.11 after the company's chief executive told lawmakers that sales of GM vehicles have already begun to dip because of speculation that the company is on the verge of bankruptcy.

'The Senate hearing appeared to leave plenty of doubt about whether the auto maker will get the government loans it seeks to avoid collapsing in coming weeks. Ford, which says it doesn't need immediate aid, lost US19c, or 6.7 per cent, to $US2.66.

'Overall, the Dow lost 215.45, or 2.51 per cent, to 8376.24. The broad S&P 500 index fell 25.52 points, or 2.93 per cent, to 845.22. The technology-heavy Nasdaq Composite declined 46.82 points, or 3.14 per cent, to 1445.56.

And in global commodity markets: 'Oil prices tumbled 6.7 per cent to settle below $US44 a barrel, hitting their lowest point since January 2005, as traders ratcheted up their bets that fuel usage will suffer a steep pullback in the months ahead'.

The Economist explains why the plunging price of oil may not be all good news.

'The price of oil would ideally reflect not only its demand and supply but take into account the damage that its use inflicts on the environment. But when oil is cheap, the hard decisions about investing in alternatives, inventing more energy-efficient plants and machinery, or changing consumer behaviour, all of which would help the world can wean itself off oil, become that much easier to postpone'.

Meanwhile, in the land of Oz, the Rudd government reportedly is going soft on its much heralded emissions trading scheme.

Clearly hard times call for a softer approach, but if climate change is the catastrophe we are led to believe, just maybe we should be tightening belts another notch and getting on with saving the planet.

Henry ventures the judgment that the only way to do this is to change the habits of a century and think 'restraint' rather than consumerism and over-stimulated growth.

We have become used to buying houses with no equity ('subprime borrowing'), buying expensive consumer goods with credit cards or with greatly delayed payment and generally expecting instant or even premature rather than delayed gratification.

Henry recalls companies he has tried to help setting growth targets of 20 %, even in mature industries where growing at the economy average of, say, 5 to 8 % might be considered heroic.

Maybe the massive cuts in equity values are reflecting sober realisation that the world has changed and it will be sensible restraint rather than unsustainable expansionism that will be valued in the twenty-first century.

There is a more general reason to consider the benefits of restraint.

What if massive interest rate cuts and fiscal expansion turn out to be like 'pushing on a string'?

This is clearly possible if businesses and consumers decide to save any windfalls and/or to pay off debt rather than resume the spending habits of a lifetime.

People might just read the unusual actions of central banks and governments as indicating panic, and this might lead them to tighten belts even more than if policy was not so obviously trying to restore business as usual.

In the immediate aftermath of the current crisis, this seems to be many people's plan. Whether the philosophy of restraint survives the recovery that will come, whether or not it is actually helped by current policy actions, is the big question.

We may be living through one of the global culture's great turning points.

Every Australian government in Henry's adult life has dreamed of reforming the tax and welfare system. Now that we have budget deficits as far as the eye can see one might imagine the matter would be urgent but Labor, who created most of the deficit problem, is still playing doggie in the manger. And there are no Magis bearing electoral gifts to this manger.

As Australians gradually realise that modern Labor stands for zero economic reform and fixing tax by attacking the superannuation balances of rich, even 'merely well-to-do', Australians, Labor will be as popular as a pork pie at a Bar Mitzvah. Certainly, that is Henry's dream, since economic and tax reform will be possible again.

The estimable Treasury 'Tax Discussion Paper', titled (I think) Re:Think, features facts like flies at a Bbq. Its prime value, perhaps, is to compare the facts about Australia's tax system with those of other countries. This storyline is as clear as the opening siren will be on Thursday night at the 'G', when Caaaarlton! plays Richmond in the opening real game of Aussie rules for season 2015. Agreed facts (P13) include the following, with Henry's comments in brackets:

* The world of globalisation creates the need to reform the Australian tax system to prevent people buying GST-free goods from overseas - think Amazon - and to prevent global companies from avoiding taxes here by fiendishly clever transfer pricing. (A braver Treasury would also have mentioned the effect of currency wars fostered by ludicrously easy monetary policies in most 'developed' nations has distorted Australia's industrial structure and decimated its manufacturing industries in particular.)

* As the Intergenerational Report (IGR) shows, average Australians are likely to be older in 40 years, placing upward pressure on various forms of social welfare and downward pressure on earning capacity of the younger Australians expected to support old and feeble Australians. (But I took exception when Re:Think asserted (on P11) that the IGR 'shows that Australia can continue to build prosperity and improve growth in living standards over the next 40 years'. 'Shows' needs to be replaced in this assertion by 'assumes provided economic reform is embraced and current political gridlock is resolved, two unlikely hypotheses.)

* Australia relies heavily on income tax, particularly company income tax, compared to other developed countries as well as our Asian competitors. (I'd have added '/trading partners' here).

*Economic modelling suggests that the taxes with particularly costs to economic growth are company tax and stamp duty. (This is a tricky issue, guarenteed to lose readers.)

* Complexity and compliance costs have many drivers and are a growing problem in the tax system. (Amen to that. Henry's advice to a shadow Treasurer once included that he stand up on national television and tear pages out of the bloated and incomprehensible income tax act to illustrate his intentions in government. He ignored this advice and his team failed to be elected.)

* Australia's tax and transfer systems are highly progressive (meaning taking from the rich and 'merely well-to-do' and giving to the poor) 'which supports fairness'. Only the Scandinavian nations have more 'progressive' systems, (which is fine if one wishes to live in a thorough-going nanny state in which basket weaving and like pursuits are among the major industries - this assertion comes with an apology to Finland.)

* Tax 'settings' should give people incentive to save for the future, but full income tax on interest rates on bank deposits (for example) and many other ways to save are conflated with lesser tax on some capital gains and even less on superannuation, and none on the family home. (This is unfair, confusing and inefficient. With the high proportion of tax on incomes, this reduces incentives to save. This is totally inappropriate for a country requiring high investment if we are to match or even beat the growth rates of the past 40 years.)

I hope I have said enough to encourage readers to go to the Treasury website and download the full report. It is worthy of a good read, and will cure insommnia, but War and Peace it ain't.)

Reducing spending by government would be the single reform that would do most to reduce the current scary growth of deficits and therefore debt. While government debt as a ratio to GDP of 50 to 60 % would 'not be too bad compared to other developed nations', it would still be pretty bad. Suppose in 40 years, Australia had a debt ratio of 50 %. Suppose further that bond rates by then were a mere 6 %. That would imply 3 % of GDP would go to paying interest on the debt, making our ability to provide welfare, or encourage innovation or defending Australia far more difficult than it is now. Imagine a bond rate of 12 %, dear readers. We'd be firked. Other 'developed' nations would be more firked, in fact, no longer 'developed', but that would be cold comfort.

Hence Henry would like the government to focus on cutting spending. This is virtually impossible with the existing Senate, which is why an eventual double dissolution (dd) election is practically mandated by any government that has plans to reform Australia's governance. I offer a modest related suggestion below.

To continue the expression of Henry's views, the single reform that would most improve the efficiency and fairness of our tax system is to raise the GST to, say, 15 % and remove all exemptions. Please note that such a tax is 25 % in those pesky Scandinavian nations that come out as 'fairest' in Re:Think's overview of global tax and transfer systems.

Overconsumption is one of Australia's abiding economic vices and, if the increase in the GST were combined with real spending savings, abolition of nuisance (mainly State) taxes and charges and cuts to income tax, (especially to slash the top rate to 40 % and remove 'bracket creep), Australia would have a fair chance of becoming the economic powerhouse it could be. Labor, of course, and the fringe dwellers in the Senate, will not allow this reform, which is another argument for the dd.

Labor will however, be happy to 'soak the rich' and hit the 'merely well-to-do' by taxing 'large balances' in Superannuation funds. Except for senior pollies and public officials, whose pensions would presumably be inviolate while private pensions were slashed by taxing either super balances or withdrawals. Please note that attacking private superannuation attacks those who have contributed most to Australia's development during their careers. Such people have paid most in income tax during their careers (even Henry once paid 66 % in the dollar) and have otherwise planned a life that allowed them a decent income in their twilight years. Should 'soak the rich' become law, many elders will decide to soldier on to replace the money grab. This will reduce opportunities for young people to achieve promotions or, as increasingly the case already, even finding a job. But its main effect would be gross intertemporal unfairness.

At least that nice Mr Hockey has said any changes will be 'prospective'.

Henry's modest suggestion was first articulated at one of those dinner parties enjoyed by the 'merely well-to-do'. Let's start a new political party, called the 'Don't Touch our Super Party'. DTOS with the right candidates would surely get sufficient votes to have a good chance of winning the balance of power in the Senate. At that point it would: (a) be able to prevent any government from raiding superannuation balances; and (b) support any government that offered real economic and tax reform.

Potential supporters or candidates may contact Henry here. Henry has no ambitition to be the Clive Palmer of DTOS, incidentally, as he has far too many useful other things to do, but would be happy to play some sort of facilitating role. Here is the key question. Is there is a potential leader - probably in her or his 40s - ready to stand up and seize the opportunity offered by Australia's current dire political gridlock?

Congratulations Mike Baird and your NSW coalition government. You have ensured continued good government in Australia's biggest state and provided great support to the Federal leader and Prime minister, Tony Abbott. The National Parliament has risen for the pre-budget break, and one hopes that more thought will go into both the substance and especially the presentation of the budget. Clearly debt of 50 or 60 % of GDP is worse than many others but also totally unacceptable. Sadly, the rhetoric on debt and deficit is still inconsistent and unconvincing.

Late last week Henry interrogated the man who manages most of his Australian-based equity investments. Coming in to the meeting, Henry wanted a more defensive asset allocation, while Mrs T was all for remaining more or less fully invested. This view was shared by Henry's favourite equity manager (HFEM). 'The US economy seems likely to slow from here, while the Eurozone may be picking up. China is not going to fall into a hole, and the US Fed's rate hikes may not begin in 2015', argued HFEM. There was further analysis of global bond markets and the assertion that the global equity boom may go on for far longer than most investment managers believe.

Since HFEM had the Thornton funds largely out of resource equities and small cap rubbish, Henry was forced to concede he may be right. 'Take care, Favourite Equity Manager', advised Henry, 'I don't want to be eating catfood due to being over-invested in equities during the Great Crash of 20xx'.

We also discussed strategy for Henry's Family Superannuation fund. There is growing confidence among poor people that the government is likely to impose some sort of tax on rich people's superannuation. Savers like Henry and his family during their declining years will be helping to finance the lifestyle of non-savers and those who have used all their super is a splurge so as to be eligable for a pension. We fully agree with Joe Hockey that Australia must abolish the 'entitlement mindset' but such a big idea needs constant reiteration and innovative illustration. 'X % of Australians receive some sort of specific assistance from government' is a compelling fact, especially when it seems that 'x' is 80.

Today has been declared national watching the cricket day in the Thornton household, as the ANZAC nations slug it out for the title of World champion of (One day) cricket. This is a bit like Australia playing the USA for the World champion of basketball, or baseball. We know if the title rested on one game, Australia might just pull it off, and the doughty fighters from NZ could do so today.

We wish NZ every good wish short of winning. Best perhaps would be NZ batting first and making a very fine 350. Then Australia's leading batters get dismissed cheaply to set up a dour struggle by middle and late order Aussie batters. Amazingly, the tail wags and with one ball to go Australia needs 6 runs to win. The NZ captain declines to order a final ball rolled down the pitch and Mitch Starc, 94 not out, wins the game with a mighty 6, landing on the roof of the highest stand. 'In your dreams, Henry', says his greatest NZ sporting pal.

In futball, the Asian champions hold world champions Germany to a 2-all draw, after being in front for much of the game. Ange is a genius and we look forward to the next World cup of Futball. Dodgy Eurozone referees will do their best to lock us out of the finals, but Ange Postacoglu and his team will find a way.

Footy's drug's scandal comes to a head just before the start of the 2015 season. Did I read that 'Bomber' Thompson when at Essendon tried 5 times to have the supplements program cancelled. Yet he was fined $30,000. Scale it up to the people who failed to notice, or to follow Bomber's advice, and you have the appropriate financial penalty. Plus a season on the sidelines?

People think of Parliament House as a place of disagreement. But if you were at the annual Science meets Parliament dinner in the Great Hall this week, you could not have witnessed more agreement. President of the Business Council of Australia, Catherine Livingstone AO, Industry and Science Minister Ian Macfarlane and Leader of the Opposition, Bill Shorten all spoke on the imperative of bringing together science and business.

Ms. Livingstone themed her speech on the critical need to build up Australia’s “knowledge infrastructure”. Mr. Macfarlane was passionate that science lies at the heart of economic and industry policy to create the jobs of the future. Mr. Shorten spoke in terms of his vision for scientists being able to create and deliver even greater benefits to society.

The goals were the same from all three speakers – a more knowledge-based economy for Australia that can continue to compete and provide the jobs of the future. The way forward was even the subject of consensus. It now seems obvious that a stronger STEM base in education and a more strategic, more stable research environment is needed. Chief Scientist, Ian Chubb AC, has long laid the groundwork for the degree of agreement we are currently experiencing.

After the speeches a few scientists in the audience expressed a bit of frustration to me about the “when” and the “how”. They essentially ask “if there is so much agreement, why isn’t more happening?” Those comments echo questions about the Cooperative Research Centres Review – “when will it be finalized? Will the 18th funding round go ahead straight away? What about the manufacturing, northern Australia and resource CRC proposals that are still up in the air?

With my CRC hat on, it is easy to share those concerns and pine for some announcements. But, as a very stronger backer of a more strategic approach to science in the country, I temper those concerns with the need to give the new Commonwealth Science Council and the government time to get it right. Professor Chubb’s has released the draft priorities from the Commonwealth Science Council. Form follows function. We all want to know the “how” and the “when” on our individual programs but, quite properly, the government needs to settle on the “what” first. We really can’t expect the government to make any specific announcements until the science priorities are bedded down. In the case of the CRC Program and the R&D tax incentive, reviews are due imminently and these must be incorporated.

We know that there are fantastic proposals out there for new or continuing CRCs. No one wants to see them funded more than me, and I know how strongly industry is backing them. They tick all the boxes for what the Business Council, the Government and the Opposition all say should be the future direction. In other areas of the science portfolio there are similar issues. But in reality, we can’t have it both ways – we can’t plead for great strategy and stability in science funding but then expect the Government will announce our particular issues today. Let’s give the Minister and Commonwealth Science Council a bit of room to get the strategy right – it seems like there is widespread consensus.

It is unfortunate that Abbott has again been messing around with his budget presentation strategy. First he tried to secure savings through the passage of various expenditure cutting measures through the Senate in order to eliminate the deficit he inherited. Now, while not completely abandoning savings in the specified areas, he suddenly says that the forthcoming budget will be “dull” and a $50-60 billion debt in mid century would be a “pretty good” result. He also foreshadows a significant increase in spending on an area already overblown with government assistance viz child care. This is confusing his own backbenchers (who appear not to have been consulted or told) and many others.

What he should be doing is continuing the message in the IGR report, which has a graph showing that, if all Abbott’s proposed savings measures were passed, the deficit would disappear around 2019-20 but if the previous policies adopted by Labor were continued, the deficit would continue increasing to reach 12 % of GDP by 2054-55. Abbott has in fact tried unsuccessfully to obtain a reply from Shorten in the House by asking what he (Shorten) would do about the deficit (and even left wing ABC interviewer Jon Faine got the same treatment). It would do no harm if this graph was advertised in various ways.

Abbott should also be adopting similar tactics with some of the Senate cross-benchers who are shown to have no logical basis for opposing at least some of the measures that will get the budget back into balance. An advertisement showing the explanations of some of these Senators might also help: it couldn’t make matters worse than they are now.

The overall strategy should be that the forthcoming budget is being forced on the government by members of Parliament who cannot explain what they would do to reduce the deficit. Given the left wing bias in the media, much of which is using Abbott’s sometimes off-beat statements to attack him and the Coalition, some more coherent response is needed.

Abbott has certainly deserved criticism for some of his remarks but the left media reaction is over the top. The existing situation puts Abbott in the position where he needs to be rather more aggressive in responding to the ABC and the Fairfax press. If a more aggressive approach is not adopted, there is a risk that polls will reverse their recent improvement and another spill or a challenge will emerge.

Read on here, (page down to Malcolm Fraser), and note the similarity of Abbott's budget dilemma and that of other governments in the past 40 years.

Farewell, Malcolm Fraser. Mr Fraser was the conservative leader to restore sanity to national affairs after the chaos and dysfunction of the Whitlam years. He was a humanitarian man who opened Australia's doors to our former allies in Vietnam, fought apartheid in South Africa and did his best to help Australia's indigenous peoples. In his later life his opinions moved to the left, but whilst in office he was a true conservative and initiated little that was new. His major mistake, it seems to me was failure to float the dollar and deregulate finance as advocated by the Campbell committee.

My tentative explanation, stimulated by remembrance of the floating of the Australian dollar, is as follows. 'Why might [John Stone] oppose, or give the appearance of opposing, such a major reform, supported by almost all respectable economists at the time? He should surely have realised that opposition would at best delay the decision and at worst, as knowledge of his opposition leaked out, might cause international investors to doubt Australia’s commitment to sensible economic policies. So why did the secretary of Treasury not cut his losses and support the float in December 1983? This is another of the mysteries facing any Agatha Christie of economic policy reform.

'Such opposition in December 1983 might (I speculate) have been a response of an institution overly conditioned to oppose the government of the day. Treasury was used to fighting economic nonsense, witness the Khemlani affair during the Whitlam government. Treasury then rightly objected to the policy agenda being hijacked by enthusiastic and incompetent amateurs. And assuming Treasury was the reforming institution Mr Stone says it was, how do we explain the Fraser years, which are famous for their lack of economic reform? Perhaps by the time a competent Labor government arrived Treasury’s senior men were unused to proposing specific reforms, or even locked into opposition to reform proposals suggested by the government or its Prime Minister'.

I added by way of a footnote: 'After writing this paragraph I came across David Kemp, ‘Advisors and Decisions 1976’, The Australian Journal of Public Administration, vol. 66, no. 1, pp 13-22. Dr Kemp says "At the core of the [Fraser] government there was an epic battle between the Prime Minister and the government’s senior advisors in the Treasury, The Department of Foreign Affairs, and the Department of the Prime Minister and Cabinet". And later, in discussing economic policy and the devaluation of 1976, Kemp says: "This refusal [to draft a statement on the economy] was essentially a strike that threatened to remove the government’s capacity to defend its position".

'It is also interesting to learn from Dr Kemp that in mid-October 1976, Friederick Hayek visited the Prime Minister and "opened the conversation with the suggestion that the exchange rate should be allowed to float".’

Mr Abbott's government may also eventually be seen as that of a true conservative. In the face of Senate opposition to most if not all of its more radical attempts attempt to fix the budget deficit, the current tactic seems to be backflips with a changing message. The most welcome backflip is the Minister for Education's double backflip with pike concerning the threat to the Senate to junk 1700 research jobs if the Higher Ed deregulation is not passed. The most serious change of communication is the switch in rhetoric about the budget. Initially there was a 'budget emergency' and the promise of a modestly tough budget. Now when a number of vital fixes have been knocked back, the next budget is going to be 'dull' and presumably relatively comfy, even though the intervening Intergenerational Report threatens eventual economic fire and brimstone. Gor blimey, comrades, Henry is totally confused and will blame no-one if she or he shares this state of mind.

The political discourse this week has included speculation that the Abbott government may bring on a 'double dissolution' of parliament. This was a view first voiced by Mrs Thornton last weekend, and I must check the phone calls next time the bill arrives.

'There is a link of sorts between what has happening so far under Abbott and what happened under the government of Malcolm Fraser.

'The latter’s death has naturally led to a wide range of commentaries. Greg Sheridan’s article (linked here) probably provides the best overall assessment as well as identifying exaggerated claims on foreign and immigration policies made by Fraser'.

Footy'n'cricket'n'stuff.

India smashed Bangladesh to progress to the semi-finals.

Australia won well against Pakistan after one of the most engaging battles between bat and ball ever seen in a world cup. Pakistan won the toss and batted, reaching a modest 213 runs. Mitchell Starc apparently sledged bowler Wahab Riaz, who seemingly could not hit the ball, not good enough even to get an edge, creating deep frustration for the Australian bowler. Riaz scored 16 shaky runs, and when Australia batted was looking for revenge.

Finch failed again, Warner made a brisk 24 and new number 3, Steve Smith settled in to rescue the innings. When , Cap'n Clarke went for 8, out came Shane Watson. Two games ago dropped and we were all told it was the end of his one day career. Mysteriously restored, as number 6, for the game against Scotland to make a brisk 67 and apparently this saved his bacon.

Wahab Riaz came on to bowl determined, it seemed, to kill 'Watto'. (As a press report said, aiming every ball at Watto's throat.) Watto ducked, weaved took his eye off the ball and then was almost caught on the boundary trying to fight back. Riaz was running through to poke fun at our man, and then resorting to blowing kisses and other undoubtedly nasty suggestions.

Watto took everything that was tossed at him and when Riaz was taken off, exhausted, after six of the best overs ever seen, Watto began to really go for it. With Smith, his replacement at number 3, and then his mate Glenn Maxwell, Watto went on to hit the winning run, a 4, to end 64 not out.

I have three gripes. Apparently both Riaz and Watson have been charged with some sort of misbehaviour. From what I saw, Watson was clearly the victim, and remained calm throughout. How could this be? Riaz was practically out-of-control.

In addition, it seemed to me that there were far more than the allowable 2 bouncers per over hurled at Watson during that 6 over barrage. Was this the umpire's revenge for being bounced by Lillee or Thompson, or some other Aussie fast bowler, 30 years ago? One is tempted to ask.

Third, why was Watson dealt with so shabbily by the Australian selectors? Perhaps being given the ultimate psychological shake-up, but in Henry's view that was totally unwarranted given Watto's record as an Australian all rounder.

The other quarter-final sees New Zealand apparently smashing the West Indies.

Caaaarlton! jumped out of the box to smash Collingwood in the first quarter of their NAB Cup workout. Then Collingwood fought back only to fail by 7 points to catch the Blues. A clever Collingwood supporter - yes, Henry knows two such - suggested the following scenario: 'Mick Malthouse told Caaaarlton! to really stick it to Collingwood in the first quarter, while Nathan Buckley told his players to take it easy so they could practice coming from behind to win'. Barely possible, dear readers, but surely such complicated games could not be played, or even imagined, by leading footy coaches? Sort of like using live bait in training greyhounds.

Henry's right hand is slowly recovering from a carpel tunnel operation, and Henry has been told not to use his mouse with the usual ('excessive' says my surgeon) frequency. That is hindering supply of blogs, but we hope normal transmission will be possible within another week or so.

Australia has a small economy struggling to support modern hi-tech jobs. It's hard to believe, but the Abbott government is trying to blackmail the Senate to support its higher ed reform by threatening to cancel the jobs of many researchers. If this madness is not quickly ended many fine young scientists will be on the dole, stacking shelves at supermarkets or applying for jobs overseas. This will in effect sabotage what should be a unified and consistent attempt to create a smart nation with clever businesses.

This is yet another ham-fisted attempt to reform economic policy that appears poorly thought out and with no attempt to carry the public with it. Henry had great hopes for this government, but it seems as if the coalition is mimicking Labor's arrogance and incompetence. Perhaps these characteristics are transmitted in the overheated air of parliament.

Certainty to the unbiased observer the House of Reps often seems like an asylum whose inmates have taken control.

It seems possible that some boffins in Brisbane have discovered that the amaloid plaques that a believed to cause Alzheimer's disease can be eliminated in mice by some sort of ultrasound. If this turns out to be a reliable way to roll back the symptoms of this dread disease the benefits for elderly Australians, not to mention elderly people everywhere, will be so great that decades of spending on medical research will be justified.

Please do not play chicken with Australia's future Mr Abbott.

Global monetary policy

The mighty US economy is creating many new jobs while many other nations a wallowing in serious, long-lived recession.

With more reliable evidence that the American economy is recovering, the US Fed has changed its language about the state of the US economy, sending waves of fear through financial markets. [Ed: later news saw US, and then global, markets, advance further. Funny things, markets.] America has already ended 'Quantitative easing', and the logical next step is to begin raising interest rates. This is happening at a time when most other developed nations are still practicing 'QE' with no plans to raise interest rates from current near zero rates.

One result is a rising US dollar and the emergence of 'currency wars'. Even Australia's RBA has decided it needs to create new record lows for interest rates, even though its governor Glenn Stevens must know that the only way the Australian economy will receive a lasting boost will be if the government embarks on real, substantial reforms.

Attempting to blackmail Senators by threatening to end the jobs of thousands of top high class scientists is just nuts.

Maybe the next discovery will be that those amaloid plaques are caused by shouting abuse in a badly ventilated House of Reps, or watching on the daily TV news.

Australia's cricket team beat Scotland and the rain to finish second in Group A of the World Cup. Captain clarke opened and, wait for it, 'Watto' returned to number three. Both did well, but Michael Starc was the star with a truly great bowling performance.

It seems that Australia will play Pakistan in the quarter final rather than South Efrica as would have been the case if rain had beaten Australia in Hobart. India, New Zealand and South Efrica await if we overcome the Pakis. The minnows of world cricket, Afghanistan, Ireland, Zimbabwe and those gritty Scots were the heroes, fighting hard against the superstars. Funny game cricket.

ASADA's decision about the future of 34 Essendon and former Essendon players will be known by 31 March. Then the footy can get off to a real start, with Richmond vrs Caaaarlton! at the 'G' on April 2. If Essendon gets off with a light smack on the wrist, Carlton's massive penalty for rorting the salary cap will be seen as the totally unfair travesty that it was.

The latest sports atrocity is the poisoning of a leading dog at the major pommie Dog Show. Shades of Phar Lap's mysterious death in America. Both atrocities would provide great challenges for Sherlock; would make for great episodes.

Plenty of 'stuff' this week, including bankruptcy of two male basketball teams, and the possibility of no national competition next year. The relative success of the women's league is a wonder to behold.

As we watched the 'Offsiders' today, Mrs T was moved to comment on the rise of women sports commentators. Henry noted the relative IQ levels shown by female commentators and suggested it is like the rise of female pollies. 'Soon the Neanderthal grunts of the males will be replaced in both sport and politics' Henry opined.

Clip clop, clip clop, clip clop: it must be the King approaching in all his finery. The crowds are cheering as he passes by. But he is absolutely starkers. This fable reminds the Raff of the current status of financial markets. Last night some of the crowd saw the King as he really is and the Dow fell around 333 points, a fall of 1.85%. European stock markets also took a battering. The price of gold fell to a 3-month low of US$1,155.60/oz and silver tumbled to US$15.67. The Aussie dollar fell a cent against the USD to 0.7634. Why was this so?

it seems, all of sudden the punters perceived that the US Federal Reserve was set to hike interest rates soon. Readers might recall that when interest rates rise, the discount rate used for future cash flows rises, and the discounted value of future cash flow falls. This results in contraction of price earnings multiples and share price falls. Of course, it won’t only be the price of equities that will be affected, so too will be bonds. At its most simplistic, when interest rates back-up, the price of bonds fall and vice versa. For many years now the bond markets have been a one-way bet. When US interest rates start to rise it’s all over red rover for bonds.

What has been the real deal about equities in the US? What the Raff is about to say is not new but needs repeating because of its importance. Many US public companies have been borrowing at near zero interest rates to buy back their own shares. So what does this do? Let’s suppose that a company’s profits are the same every year. By buying back shares, each year the number of shares on issue fall and the earnings per share rises. At a constant price earnings multiple, the company’s share price increases every year. This steady rise in the share prices of companies with a strong influence on the leading US Equity Indexes ensures the good times keep rolling. Many share price performances have absolutely nothing to do with management running a business better or growing the business or doing anything else that might generate real value for shareholders. It is dear readers smoke and mirrors.

The prospect of a near term hike in US interest rates deserves pondering. Readers might recall that the spike in US orders a few months ago was because of an abnormal increase in new orders for aircraft which distorts the 12-month moving average, as shown in the following chart. By the Raff’s reckoning the previous business cycle started in December 2002 and ended in April 2008 for total 7 years and 4 months. This current cycle started in February 2009 and thus has gone on for 6 years and 2 months.

Orders seem to have peaked and without the unusual spike in aircraft orders the 12 month moving average would show rolling over heralding the plateau of this business cycle.

It seems odd that the Federal Reserve would increase interest rates at the top of the business cycle but nothing surprises the Raff any more. Maybe the powers that be want to teach financial markets a lesson and will try to regain control once more to dominate us all.

At the time of writing ASX Materials Index is down 3.1%. BHP is down 5.5% versus RIO only down 1.4%. BHP has been creamed because of its exposure to oil where the price is hammered by a global glut and strong USD. The battle between USD and precious metal continues with the former still winning. If anyone thinks that low commodity prices are a sign of a healthy global economy then they must be in the crowd cheering on the King as he passes by in all his finery.

From where the Raff sits the world is in deep trouble. The Raff is pondering when will come calls for tariff protection. There is no such thing as a flat playing field. The free trade agreements are one-sided. Manufacturing is near to dead as a Dodo in this country. Opportunities for the young are like hen’s teeth. Boy have we stuffed it. The Raff does not see any political party with a plan to remedy the situation. Throwing money at the problem will not help; just ask the Japanese.

Dan Greenhaus comments

Yesterday's release of the durable goods report for February missed expectations. The report joins a long list of recent economic data points that have fallen short of expectations. February existing home sales and industrial production and March Empire Manufacturing index and consumer sentiment readings are but a few of the recent reports meeting this description. While the Bloomberg consensus still looks for Q1 GDP to come in around 2.2%, we think GDP is tracking closer to 1.0% than 2.0% and expect the consensus to play catch-up in the next few weeks.

This communication does not provide complete information regarding its subject matter, and no investor should take any investment action based on the information contained herein. For additional and more complete information, including Important Disclosures and Analyst's Certification and the full post, please click here.

Click Here for the Full Blog Post: 'First Quarter GDP Tracking Close to 1.0%, May End Up Even Less'.

'China dependency to hit Australia hard' says Crispin Odey, a wealthy hedge fund guy whose fund is no doubt set for the coming recession. Other similar hedge fund men are also mentioned as agreeing in the article that starts on the front page of the AFR.

Leafing thru this august news source, one is not surprised to read 'China slashes our imports'. The featured article on the same page says 'US jobs surge points to Fed rate hike'. US 'Quantitative easing', along with near zero cash rates, plus America's strong resilience, has stimulated America's recovery. Like destroying the villages to free the inhabitants, this has created the competitive currency devaluations that are giving our RBA (and all Australians) such a hard time. The same article reports 295,000 new jobs in the USA which, coming on top of several months of strong jobs growth, has reduced the rate of unemployment to a 'mere' 5.5%. Just as our unemployment is 6.4 % (or more) and 20 % for young people.

In Australia, jobs growth, and jobs ads, remain depressed and the issue is whether further rate cuts can have any effect, apart of course from fanning the fires of asset inflation. Some economists have suggested that rate cuts will further fire the housing boom and therefore stimulate the slow growth of our former 'miracle economy'. The sane members of the tribus economicus point out that it is lack of supply that is the main reason for the housing boom, not lack of demand. Why is supply constrained? Ask you local council, dear reader, regulation piled on regulation.

This is a paradigm of reasons for our overall sluggishness. Another AFR article asserts the tax reform is the priority, which gets one (feeble) cheer from Henry. Tax reform is strongly needed to pay for the many programs that we cannot afford now that the mining boom has ebbed. Of course it would be good if the loonies in the Senate would come to their senses and find ways to cut spending. With China struggling, global demand is not going to actually encourage aggregate supply in Australia. Strong overall supply, especially strong exports and strong domestic sourcing of product, replacing imports, is what is needed.

The Oz asserts today that 'we can ride out recession'. Since the RBA is not expecting recession, this is no great comfort. But the mere existence of the relevant research report suggests someone in authority is beginning to fear 'recession' is likely, or at least possible. It is slightly more than 18 month since Henry said: 'Put crudely, Australia has pissed the proceeds of the mining boom up against a wall of gullible voter expectation. In the process, mining companies allowed their cost bases to expand to unsustainable levels. Cost bases expanded in sympathy in the non-mining parts of the economy in a climate of easier than desirable monetary policy and encouraged by those vainglorious spending programs of the Rudd and Gillard Governments.

'Restoring Australia's economy to robust health will require massive effort by all Australians. The budget must be restored to a point where it has a sustainable balance, that is a balance over the course of the conceivable ups and downs of the global and local economies. Ideally there will also be a return to sustainable budget surpluses, but that is for a future government to consider when the basic repair work has been undertaken. Tax reform is needed to improve incentives and enable elimination of the many nuisance taxes that cost so much to administer. Regulations generally must be slashed, and labour market regulations revamped, to give owners of small business encouragement to create sustainable jobs'. Full article here.

RBA legend, Austin 'Aussie' Holmes used point out that someone was 'stumbling reluctantly to the truth' when he had come very late to one of his (Austin's) radical prophecies or proposals. Henry is delighted to bestow the inaugural Aussie Holmes award to the editors and staff of the AFR and the Oz.

The political story of the past few weeks is the 'near death experience' of Prime minister Tony Abbott. Mr Abbott seems to have learned a few things from this experience, as others have done before him, and now looks far more comfortable in his own skin. Gary Scarrabelotti reflects on the whole episode and offers a few suggestions designed to strengthen the PM's future, increasingly successful, performance.

Scarrabelotti also offers a qualified prediction. 'If he makes it through next Budget, however, without major errors – if there are any, expect that second “spill” motion to re-emerge around 15 June – then Tony Abbott will lead the Coalition into the next elections and will win them with a reduced but comfortable margin.

'By the way, I do not expect there to be any major Budget errors. Abbott may be devilish hard to shake from his chosen course, but his recent “near death experience” has shaken him, indeed, and he has learned much about where he went wrong.

'There will come the day when Prime Minister Abbott will feel deeply grateful for the fearful drubbing he got from his many friends and well-wishers in the News Limited stable. They’ve proved friends indeed'.

But 'Abbott’s strategy is based on an unresolved contradiction that he makes no effort to disguise. He told parliament the IGR shows “that our country’s best days are ahead of us”, yet declared in the same breath this was “provided government can live within its means”.'

The economic issue of the week, and the decade, concerns the issues raised by the Intergenerational Report (IRG). While Henry did not fall off his chair, he was interested in the dire predictions embedded in its 50 year predictions, actually extrapolations of what is likely to happen with: (a) Labor's policies; (b) the current government's (or equivalent) policies as articulated in the Abbott government's first budget; and (c) the obviously preferred option with faster budget repair that ends the growth of national debt in short order and actually pays some of it back.

Henry was disappointed that there was no useful material on just how the preferred scenario (c) could be made to arrive. We are concerned in particular with the absence of policies to get more young people into satisfying jobs and boosting productivity.

Wonderful review by Peter Craven on the soon-to-arrive third season of House of Cards.

'... everything about this show — from the magnificence of its acting to the overheard quality of its dialogue — is stunning.

'Right down to the disquieting suggestion that this monster of a man may actually be a pretty good president'.

Henry's future

In response to questions, Henry's editor and founder, PD Jonson, says he plans to take an active interest in Henry Thornton.com for as long as he is able.

The National Library of Australia in the early 2000s selected Henry Thornton for preservation. It is scheduled to be re-archived regularly. here is the link. http://pandora.nla.gov.au/tep/33415

We are delighted to learn that, in addition,'the National Library of Australia is 'committed to continuing the archiving of the Henry Thornton website for as long as it is continued to be updated. If the site is no longer being updated for whatever reason we would most likely cease new archives of the site. We would however be committed to maintaining access to already archived material in perpetuity. The Library would undertake necessary digital preservation actions to ensure that future Australians could continue to access material archived through Pandora. The archive copies would remain as static copies of the original website as they were at the time of archiving'.

Australia’s number one Bernard Tomic went past the Czech Republic’s number two player Jiri Vesely 6-4 6-3 7-6 (7-5). Thanasi Kokkinak (age 18) was picked ahead of Henry's hero LLeyton Hewitt and turned on an 'absolute cracker', fighting his way back from two sets down to beat the home team’s top rated player Lukas Rosol 4-6 2-6 7-5 7-5 6-3. More here.

The team at HenryThornton.com greatly enjoyed Australia's big win over the spirited lads from Afghanistan. But with its murderous travel schedule, inconsistent form of Captain Clarke (who has hardly played) and number 3 batter/partnership breaking bowler/star fielder 'Watto' Watson (who was dropped), the former World Cup favourites face a big task to win from here.

Kevin Sheedy has returned home, to his beloved Essendon. Should Essendon players be given time off by ASADA and/or the AFL, James Hird, say the smarties, will be finished as coach. Essendon let the Bomber go, but having a golden oldie like living legend 'Sheeds' as the club's strategy chief with a younger man running the show on game day looks like a plausible solution.

Gor blimey Comrades, in 50 years we'll be dead (certainly Henry and most dear readers) but Australians lucky enough still to be living will be older, possibly poorer and deeper in debt, unless we and our kids pull our fingers out and get on with it. The press is full of reporting and analysis, so I shall limit my comments to points I have not seen elsewhere.

I feel especially sorry for the kids. Even in Melbourne's leafy eastern suburbs many kids do not yet have regular jobs despite having at least one excellent degree, and being polite, drug-free, nicely presented and with excellent work habits. Most of the Mums and Dads can work for longer and will never require a pension or other welfare assistance, unless governments and central banks really stuff things up. The people living in Melbourne's leafy Eastern suburbs are generally well off, but only the spirits in heaven central know what it is like in remote western suburbs of our cities or in distant rural outposts. The TV news, however, suggests that 'grim' is an understatement.

Australian industry is deeply uncompetitive, the budget is out of control, there is no plan to boost competitiveness by introducing radical economic reform, and if there were the loonies in the Senate would block it. As a one-time member of the ALP, Henry is ashamed at that once great party's mulish attitude to whatever reforms that are suggested - even some it espoused before the last election - and its apparent Olympian attitude to Australia's economic challenges. Correction, FIFA's attitude to cleaning up corruption in the world game. (More here on FIFA's and Sepp Blatter's opportunity for redemption. Mr Shorten, please note.)

Even the ABS cannot totally stuff up numbers of Australian's, including numbers in different age groups. The scariest numbers in the IGR concern numbers of workers likely to be available to support pensioners by 2055. The ageing of the population, and likely rates of births, deaths and net immigration, will mean that by 2055 there will very likely be only 2.7 workers for every retiree compared to 4.5 today and 7.3 in the mid 1970s. It should be noted that equivalent numbers in most 'advanced' nations are even worse.

One of the Treasurer's lines is that 'the best is yet to come', but please note the caveat - only if more Australians work harder and more productively for longer. Henry is irristably reminded of a senior British insurance company CEO who returned from a visit to the regulator in London to report 'the best is yet to come' and that his company had beaten the main opposition once again since his company's fine for mis-selling policies was greater than their's. Our major bank CEO's perhaps feel the same about the extent of mis-selling by the financial planners they bid for so keenly when they were chasing the superannuation honey-pot.

I am aware that these comments will support the view that Henry is one of the more enthusiastic practitioners of what is sometimes called 'the dismal science'. Please note that Henry believes there are policies that would greatly improve Australia's efficiency and competitiveness.

Another line in Joe Hockey's IGR is 'the world is a competitive place'. I am confident that Australia's currently unemployed children accept the need to work harder and smarter to create a solid future for themselves and their future children. The message of the IGR is that Australia as a whole needs to do this, meaning on average every Australian faces the same challenges. Here is Henry's advice for Joe Hockey and his colleagues currently in government. As a current member of the Liberal Party, Henry sincerely hopes he is not as ashamed in five years of his colleagues in government in 2015 as he was with his Labor mates in 1975.